THERE are two banking operational systems, namely conventional banks and Islamic banks. Conventional banks and Islamic banks are two types of financial institutions that have an important role in the economy.
Although both offer similar banking services such as savings, loans, and investments, there are fundamental differences between the two related to operational principles and business practices. So what are the differences between conventional banks and Islamic banks? Let’s see the explanation below.
Conventional banks are banks that carry out their activities conventionally, referring to national and international agreements based on state law. While Islamic banking is a bank that adheres to sharia principles in accordance with Islamic principles.
Apart from these different definitions, we have summarized the differences between conventional banks and Islamic banks.
1. Operational Principles
The difference between conventional and Islamic banks in terms of operational principles lies in conventional banks operating based on the principle of interest. They offer a variety of products and services that are based on collecting and giving interest from and to customers. For example, in loan products, banks charge interest on the amount of money lent. While Islamic banks manage customer funds in a manner that is in accordance with Islamic principles where they invest in halal and promising projects, and profits are shared between the bank and the customer based on a profit-sharing agreement. The risk of loss is also borne by both parties by the bank and the customer.
Also read: Encouraging Financial Inclusion, Aladin Bank Collaborates with Retail Companies
2. Supervision
Conventional banks are supervised by financial authorities such as central banks, and must comply with applicable banking regulations. They have no specific obligations regarding sharia compliance. In contrast to Islamic banks, in addition to being supervised by the central bank, Islamic banks are also supervised by the Sharia Supervisory Board (DPS) which ensures that all products and services are in accordance with sharia provisions. They must obtain sharia certification for their products.
3. Products and Services
Also read: Partnering with InsurTech, Bank Aladin Continues to Expand Digital Ecosystem
Products and services offered by conventional banks include savings, deposits, personal loans, credit cards, and various types of investments. All of these products usually involve interest charges. Meanwhile, products and services offered by Islamic banks include wadiah savings (custody), mudharabah deposits (profit sharing), murabahah financing (buying and selling), ijarah financing (renting), and profit-sharing-based investments. There are no products that involve interest, but there is a profit margin determined at the beginning of the transaction.
4. Fund Management
Conventional banks manage customer funds by lending money to third parties in return for interest. Bank profits are mostly derived from the difference between the interest received from loans and the interest paid to depositors. In contrast, Islamic banks manage customer funds in a manner that is in accordance with sharia principles. They invest in halal and promising projects, and profits are shared between the bank and the customer based on a profit-sharing agreement. The risk of loss is also borne jointly by the bank and the customer.
Also read: Local Government Funds in Banks of IDR 192.6 Trillion Can Be Optimized
5. Profit Sharing
In conventional banks, profits are obtained from interest rates charged to customers. While the profits obtained by Islamic banks are obtained from rent, sales and purchase results, and partnerships with customers.
Those are some of the differences between Islamic and conventional banks. (P-5)
#Understanding #Differences #Islamic #Banks #Conventional #Banks #Heres #Explanation
